The mortgage lending process

Usually a lender (the bank or building society) will consider the following when deciding whether to approve your mortgage application:

  • The information in your application form, including your salary and employment details
  • The information in your credit report
  • Their own policy rules
  • The amount you want to borrow and size of your deposit
  • Your monthly outgoings and spending habits
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Part 1

Up to one year before making an application

Scrutinise your spending

Mortgage affordability rules were introduced to help prevent borrowers from struggling in the event of an interest rate rise. This means lenders will now look closely at your income, outgoings and savings each month to make sure you have flexibility in your disposable income in case your credit repayments increase.

Prepare by:

  • Scrutinising your last few months’ outgoings carefully to understand exactly where your money is going
  • Building good habits like increasing the amount you save each month and clearing overdrafts
  • Cutting back on discretionary spending to ensure you close out the month with a surplus - however small
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Do your research

Smart buyers shop around. Spending the time to do your research now will pay off in the long run. Use online resources such as mortgage calculators and comparison websites, and speak to your broker or mortgage adviser.

  • Understand the different mortgage types on offer and which might suit your circumstances best
  • Work out what you can afford to borrow and repay, both now and if rates rise by 1%, 2% or more
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Lenders often look at a measure called ‘loan to value’, which is usually expressed as a percentage. This compares the amount you want to borrow to the value of the property you are buying. If you have a relatively large deposit and/or equity in an existing property, it will reduce your loan to value which will usually help you qualify for more and cheaper mortgage deals.

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Check your credit report

Now is a good time to check your credit report as you start your mortgage application journey. Out of date or inaccurate information could prevent you from getting a mortgage, so take a few minutes to make sure it’s all correct.

  • Check your credit report with all three credit reference agencies, as they each hold slightly different information
  • Ensure everything is accurate, up to date and reflects your current circumstances
  • Ensure all open credit accounts are recorded on your credit report and that any old accounts that have been paid off are marked as “settled”

If you find anything inaccurate, contact the credit reference agency in question and request that the entry be investigated with the relevant lender.

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Room to improve

If your credit report has room for improvement, take steps now to allow yourself the time to get it into shape before making your mortgage application. If your credit report paints a less-than-perfect picture of you financially, there are a number of steps you can take.

  • Ensure you’re registered on the Electoral Roll
  • Pay down outstanding balances to less than 50% of your limit on each account
  • Pay off more than the minimum repayments on your accounts each month
  • Never miss a repayment
  • Settle inactive accounts

The specific factors will depend on your own circumstances; however services like Experian CreditExpert can help you manage and improve your credit report with tailored guidance in advance of making an application.

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If you have a County Court Judgment, Bankruptcy or Individual Voluntary Agreement (IVA) on your credit report - it may be worth holding off on making a mortgage application until this has dropped off, as they are likely to be viewed negatively by most lenders. These will stay on your credit report for six years from the date they are discharged.

Part 2

Six months out

Avoid additional borrowing

A flurry of recent applications for loans or other types of credit may worry mortgage lenders as it can make it appear you’re in financial difficulty, so it’s best to avoid borrowing for about six months before making your application. Lenders will also look at whether you’ve increased or decreased your borrowing year on year, and will look more favourably on you if you owe less this year than you did last year.

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It’s a good idea to take time at this stage to close down any unused accounts you may have. Settled accounts can have a positive impact on how a lender scores you.

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Get quotes

When you’ve done your research, make sure you understand the difference between a quote and an agreement in principle.

  • A quote will tell you what mortgage rate you’re likely to get and how much repayments would be, and it won’t affect your credit score
  • An "agreement in principle" will tell you if a lender is likely to offer you a specific mortgage. This requires a full search of your credit report and will leave a footprint that can be seen by other lenders
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Make sure you’ve found the best available deal for your circumstances before applying for an agreement in principle.

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Part 3

Just before you buy

Double check

Don’t fall at the last hurdle. Right before you make your application, take a little time to do some last-minute checks to ensure your house is in order.

  • Check your credit report again to make sure nothing has changed and everything is accurate and up to date right before you apply
  • Check the exact way your address and other personal details are written on your credit report – e.g. “Flat A, 125 High Street” versus “125A High Street.” Ensure that your address is written in a consistent format and that you write it as such on your application form or other documentation
  • Don’t underestimate additional costs such as legal fees, stamp duty and moving bills. Make sure you’ve factored these costs in to your planning
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"Thanks - but no thanks"

If your application is turned down, don’t panic! Speak to the lender and find out why. Their answer will determine the next step.

  • If your credit rating is poor, confirm what factors are bringing it down and take the time to improve it before applying again
  • If your credit rating is strong, it may be the case that you just don’t fit the policy rules of the lender in question. If this is the case, you may consider applying to a different lender

Remember that credit application searches appear on a credit report for one year. They are removed after 12 months, but most lenders would only be concerned about excessive credit applications made in the last three to six months.

Make sure you’ve found the best available deal for your circumstances before applying for an agreement in principle.

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Related articles for further reading

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